Gopalan Nambiyar, C.J.
1. The Peria Karamalai Tea & Produce Co. Ltd. is a private limited company. It was assessed under the Companies (Profits) Surtax Act, 1964, for the assessment years 1965-66, 1966-67 and 1967-68. For 1965-66 and 1966-67 the assessment was completed on February 17, 1967, and for 1967-68, on February 14, 1968. For the three relevant assessment years the assessee had created development rebate reserve in excess of what had to be statutorily created. In the three original assessments such excess had been included in the computation of capital under the Second Schedule to the Companies (Profits)' Surtax Act, 1964, Later on, the ITO being of the opinion that on account of the inclusion of the excess development rebate reserve in the capital chargeable profits had escaped assessment, reopened these assessments. After hearing the objections of the assessee, the three assessments were remade on March 23, 1974, after excluding from the amount of capital such excess development rebate reserve.
2. On appeal by the assessee, the AAC held that the excess development rebate reserve is includible in the capital. On January 11, 1971, the CBDT had issued Circular No. 53 F. No. 7/2/68-TPL* bringing to the notice of the I.T. authorities that development rebate in excess of the statutory limit is includible in the capital. The AAC followed the circular and directed the ITO to include the capital. The department appealed to the Tribunal. The Tribunal took the view that the question was covered by the decision of the Kerala High Court in Travancore Rayon's case, viz., I.T.R. Nos. 110 & 131 of 1971 (unreported). Following that judgment, the Tribunal held against the assessee. On the question as to whether the assessee was entitled to the benefit of the circular, the Tribunal held that as the circular was issued only in 1971, it will not apply to assessments in respect of the years 1965-66, 1966-67 and 1967-68 made and completed when the circular was not in existence. It was also pointed out by the departmental representative that on September 9, 1974, the Commissioner of Income-tax, Kerala, had issued the direction to the assessing officers that the circular is not applicable to the Kerala charge. The assessee then pointed out that on November 2, 1974, in another letter, the Commissioner had stated that the instruction of September 9, 1974, will apply only to pending assessments. As these two instructions of the Commissioner were after the date of reassessments, the Tribunal did not refer to these letters. It allowed the department's appeal and restored the assessments of the ITO. At the instance of the assessee, the following question of law has been referred, viz.:
' Whether the circular (No. 53-F. No. 7/2/68-TPL dated llth January, 1971) issued by the Central Board of Direct Taxes and in which circular the extent of its application is not specified is applicable to reassessments in respect of assessment years 1965-66, 1966-67 and 1967-68, even though such reassessments were made only after the aforesaid date of January 11, 1971 ?'
3. A Division Bench of this court in Travancore Rayon's case (ITR No. 110 and 131 of 1971), stated:
'Development rebate under Section 33 of the Income-tax Act being a deduction allowed in computing the income of the company for the purpose of assessment of income-tax, if any, part of that rebate is kept as a reserve. Clause (iii) of Rule 1 provides that the amount must be reduced from the other reserves. Sub-section 3 of Section 34 of the Income-tax Act,1961, requires 75% of the development rebate to be credited as a reserve for future use. That is allowed to be reckoned as a reserve under Clause (ii). The excess over 75% will not come under either Clause (ii) or Clause (iii).'
4. Under Schedule II, Rule 1, Clauses (ii) and (iii) of the Companies (Profits) Surtax Act, 1964, it is provided :
'1. Subject to the other provisions contained in this Schedule, the capital of a company shall be the aggregate of the amounts as on the first day of the previous year relevant to the assessment year, of--......
(ii) its reserves, if any, created under the proviso (b) to Clause (vib) of Sub-section (2) of Section 10 of the Indian Income-tax Act, 1922 (XI of 1922), or under Sub-section (3) of Section 34 of the Income-tax Act, 1961 (XLIII of 1961);
(iii) its other reserves as reduced by the amounts credited to such reserves as have been allowed as a deduction in computing the income of the company for the purposes of the Indian Income-tax Act, 1922 (XI of 1922), or the Income-tax Act, 1961 (XLIII of 1961).'
5. The observation of the Division Bench of this court extracted above, which was followed by the Tribunal, was in respect of the above provision.
6. The original assessments were made on February 17, 1967, for 1965-66 and 1966-67, and on February 14, 1968, for 1967-68. Development reserve to the extent of about rupees two lakhs twenty-thousand was allowed under Section 8 of the Act. Notice of reassessment was issued and reassessment was ordered on March 22, 1974, changing the two lakhs twenty-thousand of development rebate to one lakh fifty-five thousand odd. Meanwhile, a circular had been issued on January 11, 1971, by the CBDT to which we made reference earlier. It was withdrawn on September 9, 1974. It was thus in force on the date of reassessment. The circular, in brief, stated that excess development reserve is includible in the capital. The legal effect of such circulars fell to be examined recently by a Full Bench of this court in CIT v. Edward : 119ITR334(Ker) . It was pointed out that although the circulars are primarily meant to serve as guidelines, and are binding on the subordinate authorities vested with the administration of the I.T. Act, some of them from their nature and content, do confer some privileges and rights on the assessee whose cases have to be assessed. There may be circulars which affect only certain administrative or procedural aspects. There may equally be circulars which affect certain important rights in regard to assessment of the assessee. This, it was stated, was sufficiently implicit in Section 119(2) of the Act itself. In regard to the latter type of circulars affecting the rights of the assessee, despite the power to recall or withdraw the circulars, the assessee's rights to have the assessment effected or carried out in accordance with the circulars, cannot be prejudicially affected by the recall orwithdrawal of the circulars. It was held that on the facts the assessee was entitled to have the assessment made and completed in accordance with the circulars. Relying on the decision counsel for the assessee argued that the decision of the AAC that reassessment was to be made applying the circular was correct.
7. Counsel for the revenue invited attention to page 895 of Kanga and Palkhivala's The Law and Practice of Income Tax, 7th edn., vol. I. Speaking with reference to reassessment, it was stated that the proceedings by way of reassessment must be deemed to relate to the original proceedings which commenced with a return filed under Section 139(1) or the issue of a notice under Section 139(2); and that the assessment under this section must be made as if it were made in the relevant assessment year--vide Lakshminarain Bhadani v. CIT : 20ITR594(SC) . It is further observed that the assessment must be based on the provisions of the Act as it stood in the year in which the income ought to have been assessed--vide Krishna Hydraulic Press Ltd. v. CIT : 11ITR504(Cal) and Maneklal Chunilal & Sons Ltd. v. CIT : 24ITR375(Bom) . The tax should be charged at the rate it would have been charged had the income not escaped assessment. In view of the principle noticed above, and bearing in mind the relevant dates of assessment, namely, February 17, 1967, in respect of 1965-66 and 1966-67, and February 14, 1968, in respect of 1967-68, we see no ground for applying the provisions of the circular dated January 11, 1971, to the assessment. Reassessment is with effect from the date of the original assessment. In that sense, therefore, there is no scope for taking into account the circular which came into force on January 11, 1971, and remained in force till September 9, 1974. In that view again, there is no room to apply the principle of our recent ruling in CIT v. Edward : 119ITR334(Ker) ,
8. Counsel for the assessee relied upon the decision of a Division Bench of the Bombay High Court in Tata Iron & Steel Co. Ltd. v. N. C. Upadhya : 96ITR1(Bom) . When the decision is fully examined it will be found that it is distinguishable on the facts. The decision was concerned with several aspects. But briefly stated, the position disclosed was this. Three rectification notices under Section 154 of the I.T. Act, 1961, for the assessment years 1965-66, 1966-67 and 1967-68, and the orders in pursuance of those notices were challenged in one of the petitions dealt with. A rectification notice dated March 12, 1973, for the assessment year 1968-69 was challenged in the second of the petitions dealt with in the judgment. For all the four years the petitioner had created some development reserve and claimed development rebate under Section 33 of the I.T. Act. Apart from plant and machinery installed, during these years the petitioner had also installed some rolling mill rolls. During these four years the petitioner had not created development reserve after taking into consideration the rolling mills installed by it and it had not claimed any rebate in respect of the same. The petitioner's explanation was that the I.T. authorities did not include the rolling mill rolls in the expression 'plant and machinery'. The CBDT on November 16, 1968, issued a circular and directed all the ITOs to allow rebate on the cost of the rolling mills. There was also a circular dated November 21, 1958, by the CBR regarding the allowance of development rebate to tea companies--admitted to be of general application. That circular stated that where there is no deliberate contravention of the condition as to creation of reserve fund equal to 75% and the assessee had made his own bona fide computation, the ITOs were to condone genuine deficiencies subject to the shortfall being made good by the assessee through the creation of an additional reserve in the current year's books within the time allowed by the officer. On the basis of these two circulars, the petitioner claimed development rebate on the rolling mill rolls for the four years covered by these two petitions and for that purpose created additional development rebate reserve. The petitioner filed revised returns and the ITO granted the additional development rebate for the four years. However, on February 7, .1972, a notice under Section 154 of the Act was served on the petitioner whereby the ITO proposed to rectify the assessment for the years 1965-66, 1966-67 and 1967-68, on the ground that the rebate was wrongly allowed on the rolling mill rolls in view of the Supreme Court judgment in Indian Overseas Bank Ltd. v. CIT : 77ITR512(SC) . An order of rectification for the three years followed. The notice and the order were challenged by the petitioner. For 1968-69, a rectification notice was issued and that was challenged. It would thus be seen that the facts here are fundamentally different. As a result of the revised returns after the circular, the petitioner had been granted additional development rebate for all the four years. That was when the circulars were in force. By the rectification notices the development rebate thus granted was sought to be undone. This attracts the principle of our decision in CIT v. Edward : 119ITR334(Ker) . The decision is, therefore, distinguishable.
9. In the result, we answer the question referred in the affirmative, that is, in favour of the department and against the assessee. There will be no order as to costs.
10. A copy of our judgment under the signature of the Registrar and the seal of this court will be communicated to the Income-tax Appellate Tribunal, Cochin Bench, as required by law.